Applicants are judged on how they handle credit

Whenever you apply for a loan, a credit card, to open a charge account or to purchase an item on credit, you will be asked to complete an application form and then wait for the credit grantor’s decision. The credit clerk at the bank, trust company, or store will submit a request to the credit bureau for credit information about you. Three conditions must be met before the credit officer can receive information about your credit history:

1. The inquiring firm must be a member of the credit bureau.
2. The bureau member must have your written permission in order to access your file or notify you in writing within three days of the fact they have accessed your credit bureau and for what reason. (The time frame for notice may depend on the province you are in.)
3. The file that the credit bureaus send to the inquiring member must apply to you and not to anyone else.

Safeguards are built into the credit reporting system to ensure that access to credit information is restricted to members of the credit bureau. This transfer of information is completed electronically or with a member code for telephone requests. To be sure that the file transferred is the right one, a comparison is made between the information on your application form and that in the credit bureau. In addition to your name and address, other pieces of information that may be used to identify people are date of birth, social insurance number (providing this information is optional on credit applications), credit card account numbers, and your place of employment.

Assuming that the information on your credit application matches the credit bureau file, the lender and the credit bureau will exchange information. The credit bureau file will be updated with any new facts that you have provided on your application, and the creditor will find out how you have handled credit in the past.

Credit Rating

The decision whether or not to grant credit is made by the credit grantor, not the credit bureau. Credit bureaus merely collect and sell information; they do not make assessments regarding anyone’s capacity to handle credit. In the interest of efficiency and reduced costs, large firms are increasingly starting to depend heavily on an automatic assessment system, called credit scoring, whereby points are given for certain characteristics. The importance given to these characteristics may vary with each credit grantor, as well. Changes in the economic climate and the time of the year may also affect the company’s decision – making credit easier or harder to obtain.

In the credit industry, there is a general consensus known as the traditional three C’s of credit granting – namely capacity, character and collateral – all play an important role in the granting of credit. Higher scores are assigned to those who own property, who show stability in where they live and in their jobs, who possess several credit cards, who have repaid past credit obligations on time, who do not write bad cheques, and those who have a low debt/income ratio.

Many lenders have programmed their computer systems to score the information on the application form quickly and to indicate whether the applicant is a good risk, a bad risk or an uncertain risk. Some lending decisions may be fairly obvious and may be made without contacting the credit bureaus. Some lenders may have internal lending policies that all applicants whose scores rank in the top 10 to 20% will be considered good risk and will be automatically approved, while the bottom 25% will be considered bad risks and will be automatically rejected.

Half of all credit applicants will fall into the “uncertain risk” category; therefore, more information is needed to make a lending decision. It is common for credit grantors to pull credit bureau reports for this group of people. Credit grantors pay the credit bureau for access to you file. It is important to note that lending policies are not generic – they are designed to fit the lender. So if one credit grantor has refused your application for credit that does not necessarily imply they all will.

The assessment of your borrowing power will depend on the credit grantor, you may find that at any given time some lenders will be easier to obtain credit from than others. Obviously this is more apt to be true if you fall into the uncertain risk category, because each lender may vary in the risk they are willing to accept. In many cases, the decision to lend or not to lend is based on some factors other than personal history. Lending policies are also affected by economic conditions and by the financial situation of the lender themselves.

At times lenders may have more money and be anxious to lend, while other times there may be high unemployment, and this may make many lenders change the model they are using to lend money. However, be aware that every time you apply for credit, you will lower your credit score on the credit bureau file. So only apply for credit that you want – other wise you may be hurting your own credit rating. 

Did you know that you have the legal right to see your credit bureau file at any time? Have you read your credit bureau file lately? If not, why not, it is a free service in most provinces – download your credit report request form to receive a free copy of your credit bureau report.